By Cara Lombardo and Annie Gasparro
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (September 16, 2020).
Kraft Heinz Co. is parting with a big chunk of its cheese
business, a sign of the challenges facing food companies whose
scale complicated operations as the coronavirus pandemic drove
unprecedented demand.
Kraft Heinz said Tuesday that it had reached a deal to sell its
U.S. natural-cheese business and a mix of other cheese brands in
North America and internationally to France's Groupe Lactalis SA
for $3.2 billion.
The Wall Street Journal first reported that the sale was
imminent earlier Tuesday. The maker of Heinz ketchup and Oscar
Mayer deli meats, among many other foods, said the sale is part of
its plan to simplify its business and focus on brands that have the
best potential to resonate with contemporary consumers.
"We wandered away from the consumer," Kraft Heinz Chief Growth
Officer Nina Barton said Tuesday at a virtual meeting with
investors. "We are rebuilding the connection."
Sales of groceries including packaged foods have surged during
the coronavirus pandemic as consumers have stocked their pantries
and shifted to eating mostly at home. But some established
companies have lost market share even as their sales have risen
because they can't keep up with the unexpected demand. And the
sudden need for more cleaning supplies, protective equipment and
delivery trucks cut into their profit margins.
Kraft Heinz had just begun an overhaul of its portfolio of
dozens of brands when the pandemic hit. While Kraft Heinz struggled
to make enough macaroni and cheese to meet demand, competitors
gained ground, such as General Mills Inc. with its Progresso soup
and Betty Crocker baking mixes. The pandemic reinforced a theme
evident in Kraft Heinz's challenges since the company was created
in a 2015 merger: bigger isn't always better.
Nestlé SA, Unilever PLC and other big food makers have also made
significant divestitures in recent years to better focus their
operations.
Kraft Heinz has struggled since the merger with consumers
defecting to foods that seem trendier or healthier, and to
lower-priced store brands. The pressure to revive sales has
tempered its ability to improve profitability. That is reflected in
a stock that has lost more than half its value since early days of
the merger, giving it a market capitalization today of about $40
billion, not much more than its debt load of nearly $30 billion.
Some proceeds from the sale to Lactalis are earmarked for debt
reduction, the company said.
Kraft Heinz said at its investor meeting that it plans to cut $2
billion in costs over five years, returning to the strategy that
inspired the company's formation in the merger five years ago. It
is starting with $350 million to $400 million in gross savings this
year.
Kraft Heinz's shares edged up 0.3% on Tuesday to $31.97.
Closely held Lactalis, a global dairy company based in France,
produces brie, ricotta and other cheeses in the U.S. and sells them
under brands including President.
The company entered the U.S. about 40 years ago and has been on
an expansion spree, acquiring Stonyfield organic yogurt from Danone
SA in 2017 in a deal valued at $875 million.
Adding the Kraft cheese business would boost the company's
footprint further at a time when demand for staple groceries is
higher than ever amid the coronavirus pandemic.
The sale will include Kraft shredded and blocks of cheese and
the Cracker Barrel brand in the U.S., Breakstone's cottage cheese
and sour cream, and some other assets. Kraft Heinz will keep
Philadelphia cream cheese, Velveeta, Cheez Whiz and Kraft Singles
in the U.S. It will also retain its macaroni-and-cheese business
world-wide.
The brands Kraft Heinz is selling had about $1.8 billion in
sales over the past year, representing roughly 7% of the company's
annual revenue.
In 2018, Kraft Heinz agreed to sell its Canadian natural-cheese
business to Parmalat for over $1 billion.
The sale to Lactalis comes as Kraft Heinz reorganizes its
business under six new platforms that it says are more focused on
what consumers want, such as more convenient meals and snacks,
instead of 55 different grocery categories. The new approach,
executives said, will help the company be more agile and innovate
more effectively.
In the years following the merger, Kraft Heinz slashed costs to
generate about $1.7 billion in net savings. Its sales growth and
market share suffered.
That contributed to several of its biggest brands losing value.
Since February 2019, Kraft Heinz has written down the value of its
brands by about $20 billion.
Kraft Heinz Chief Executive Miguel Patricio said the company,
which is partly owned by Brazilian investment firm 3G Capital, was
too focused on cost cuts and made shortsighted decisions under its
prior leadership. "We are changing that mind-set," he said in an
interview.
Last year, Mr. Patricio took over at Kraft Heinz after several
years as chief marketing officer at Anheuser-Busch InBev SA,
another company in which 3G's partners are invested.
Mr. Patricio said Kraft Heinz will be more strategic about how
it cuts costs and will invest more of the savings in marketing its
brands, rather than passing it all on to the bottom line as the
company did in the past.
"Do we need to reduce margins to grow brands? The answer is no,"
he said.
RBC Capital Markets LLC was Kraft Heinz's financial adviser and
Paul, Weiss, Rifkind, Wharton & Garrison LLP served as its
legal adviser. Perella Weinberg Partners was Lactalis's financial
adviser and Dentons served as its legal adviser.
Write to Cara Lombardo at cara.lombardo@wsj.com and Annie
Gasparro at annie.gasparro@wsj.com
(END) Dow Jones Newswires
September 16, 2020 02:47 ET (06:47 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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